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Water is Free, Isn’t It?

“If people can’t trade water, then they just keep doing the same things that they’ve been doing.” – Reed Watson, executive director of the Property Environment Research Center (PERC)

I live in California. You may have heard that it is in a major drought. At the end of the winter in 2015, the snowpack which usually builds up during the winter and then melts during the spring and summer, replenishing streams and rivers, was virtually non-existent. California’s Governor, Jerry Brown, called for a 25% reduction in (domestic) water use (his name isn’t Brown for nothing).

This affected water companies, large, small, and tiny. I am part of a homeowner’s association that incorporated in the late 1930s to pool its resources, one of which is water.

The corporation, of twenty-six homes, runs its own water company, which pulls water from Clear lake (1). It also has a community dock and a beach for recreation. Our tiny water company must meet state and federal requirements of the Surface Water Treatment Rules of the Safe Drinking Water Act. We filter and filter again until it is clearer than the mandated maximum turbidity allowance (the clearer the water the less chance of organisms in it) and then the water is chlorinated (to disinfect it) and stored for use by our community. We test our chlorination levels daily and send out samples to an independent lab to check our product for microorganisms.

The point is that water that flows from our (and presumably all community taps) takes money. The raw water is pumped in, filtered, disinfected, stored, and distributed to our neighbors’ taps.

Even if the labor to run, maintain, and monitor our water system were free (and it’s not); our water filtration plant and distribution system need to meet state and federal standards, needs stuff such as filters, pumps, pipes, storage tanks, power; and lots more to keep it operating. Our tiny corporation operates like a non-profit (it was incorporated before non-profits existed, and the State of California is loathe to change its status), so charges its customers (us and our neighbors) operating costs plus 5% for an equipment replacement fund. Even so, some of our neighbors refuse to pay their full bill, instead paying what they think is “fair.” This, as you might imagine, leaves us a bit short on funds.

Water is a resource; drinking water is a product.

We are mandated to conserve our product because the state owns the resource.

Many have recommended that markets rather than mandates could accomplish the governor’s goal better (see Ronald Bailey’s and Tim Wortall’s posts). Rather than telling people they can water their lawn for only ten minutes once a week, the water company would just charge more for using more than a minimal allotment. In other words, tiered pricing. If something costs more, people tend to find ways to use less of it or find substitutes (obviously there is no substitute for water, but it’s source and production, e.g., the ocean and desalination, can all be considered). This could be done by private water companies only; Proposition 218 passed in 1996 by California voters says that government cannot charge more for a service than the cost of producing it.

I found a nice article on tier pricing for water allocation by Tim Worstall and tweeted it.

This is true for any product. I am not in the market for a Lamborghini, for example. I realize that we are talking about water, an essential chemical that our bodies require, but governments (or companies) can help by making sure the needs of the poor are met. In our case we don’t shut off water to our neighbors when they are tight on funds and can’t pay.

“The general view among economists is that the best way of allocating any scarce resource is through the market. That is, through allowing prices to vary so that those who value the resource most get to use it by offering the highest price for it….Those activities that do not cover the cost of water will not be done. That frees up water to do the things that add more value than the cost of the water. And that’s it, that’s all that needs to be done.” – Tim Worstall

@AuntieDote It still involves more people than bureaucracy does. It’s far from perfect. Much like democracy, the best choice of the worst.

I was not and am not keen on government setting prices and allocating.

“Civil government, so far as it is instituted for the security of property, is in reality instituted for the defense of the rich against the poor, or of those who have some property against those who have none at all.”– Adam Smith

@Timberati I’m not interested in bureaucracy. I’m still trying to get the point that “price allocates resources”. I’m not seeing how it can.

@Timberati I’m puzzled as to how “price allocates resources” efficiently, when it seems all price can do is give control to highest bidder. — Auntie Dote (@AuntieDote) June 24, 2015

I’m sure she thought she was engaged in a form of Socratic questioning and eventually I would see the error of my ways.

So an evil Koch brother or worse, a corporation like ours will hoard the water and not let anyone water crops or landscaping or have a drink? Really? Wealth is created by providing goods and services that people want so much they are willing to provide a good or service to someone else; they are then paid in kind or with money to use to purchase something they want.

Free markets may not be the best system for allocating resources, but markets operate better than the alternatives, at least, so far.

“It is not from the benevolence of the butcher, the brewer, or the baker that we expect our dinner, but from their regard to their own self-interest. We address ourselves not to their humanity but to their self-love, and never talk to them of our own necessities, but of their advantages” ? Adam Smith, An Inquiry into the Nature & Causes of the Wealth of Nations, Vol 1

Footnotes:

Clear Lake is misnomer if ever there was one. According to Pete Richerson and Scott Richerson, ‘Livingston Stone, a government fish culturist who attempted to establish Great Lakes whitefish in the lake in 1872-3, described the turbidity and “swamp-water” taste of the lake, complaining that “it is a singular fact, illustrating the inaptness with which names are often given to natural objects, that the water of Clear Lake is never clear.”‘ (Richerson and Richerson,